Mediobanca Analysts Point to Real Estate Woes

A property for sale sign sits on a wall near residential apartments in the Parioli district of Rome, Italy, on Wednesday, Jan. 2, 2013.

Bloomberg News

Italy’s recession is bad, the most brutal since 1945 in fact. Now it could be poised to get that little bit worse as sliding real estate prices begin to hurt local banks, according to a sweeping new study from Mediobanca analysts.

Two of the bank’s analysts, Antonio Guglielmi and Riccardo Rovere, point to real estate as a hitherto unnoticed problem looming on the horizon.

Property prices have so far fallen only 12% since their 2008 peak, less than half the correction in Spain, and there is no huge housing glut or mortgage spree that could be compared to Iberia.

But, crucially, actual house sales have fallen 26% year-on-year to their lowest level since 1985, signaling the risk that prices may follow, putting the pinch on loan coverage ratios at Italian banks, they say.

A 10% drop in real estate prices, which is the level suggested in the note, would “wash out” some 17% of Italian banks’ Core Tier 1 capital under present Basel rules, they calculate. That would put a further crimp on already anemic private-sector lending capability.

What’s worse is that falling property values would hit household wealth given Italy’s high property ownership rate of 80%, a level trailing only Spain and Greece – hardly happy benchmarks – in all of Europe. That makes it even harder, both politically and technically, to leverage Italy’s seemingly rich families to steady an economy during a period of public-sector deleveraging.

Italian policy makers have long cited the country’s €9.5 trillion ($12.4 trillion) in private wealth as a reason investors shouldn’t worry about the local sovereign liabilities. But only 20% of that wealth consists of liquid assets, and of that 80% is retail savings, withdrawal of which would put pressure on banks or on the Treasury itself, given that Italians keep 9% of their financial wealth in domestic government bonds.

The Mediobanca report, which has already been sent to investors, asserts that Italy today is in a situation similar to the early 1990s, when political and economic woes forced the country to exit the European monetary system despite having devalued the lira, pushed through sweeping austerity measures and engaged in a massive privatization campaign.

London-based Mr. Guglielmi and Mr. Rovere have already outlined their bleak view on Italy’s €2 trillion sovereign debt before, in particular emphasizing the yield gap between BOTs, or Treasury bills, and BTPs, or longer-term Treasury bonds, of the same maturity.

A report Tuesday, citing Mr. Guglielmi and Mr. Rovere’s research, said that Italy could need an EU rescue within six months. Markets did not move significantly on that news, with the 10 year bond barely changed at 4.87%, suggesting investors had already taken account of the research note, which was distributed to Mediobanca clients last week.